Publication of the UK secondary capital raising review

background

Following Lord Hill’s UK Listings Review Report in March 2021 on the proposed reforms for the UK equity capital markets, on 19 July 2022, the UK Secondary Capital Raising Review (“SCRR”) was published. The aim of the SCRR is to increase the efficiency of the capital raising process and facilitate companies raising money to develop quickly and attract new listed companies in the UK. The recommendations once implemented will improve the efficiency of secondary capital raisings by listed companies to help enhance UK markets to appear more appealing for issuers.

Recommendations in SCRR

Key SCRR immediate and near and medium recommendations are listed in the table below:

Summary
Maintaining and enhancing pre-emption (immediate)

 

 

The SCRR has recommended that the principle of pre-emption should remain and should be enhanced as an important shareholder protection in the UK capital market. The Pre-Emption Group (“PEG”) who, oversees the development of practice in relation to the disapplication of pre-emption rights and regulatory report on the application of the statement of principles, will be governed more formerly, with changes made to its governance structure, appointment process (making it more transparent), membership review, and annual reporting.

 

Increasing the ability of companies to raise smaller amounts of funds quickly and cheaply (immediate)

 

The PEG guidelines are to be amended to give companies the opportunity to issue up to 20% of overall share capital (10% for any purpose and 10% for acquisitions or specified capital investment). It is also required that companies consult with key shareholders, and provide explanations for fundraising, considering the involvement of retail investors in all placings.

Companies must also report publicly on their compliance with PEG guidelines and other details following pacing, in their annual reports.

Reducing regulatory involvement in larger fundraising (near and medium term) Companies on the UK public capital markets are subject to disclosure and market obligations, and such companies are raising money from shareholders, who have already made an investment decision in relation to the company. The disclosure that is required in the prospectus in connection with the potential fundraise is a repetition of the information that already exists in the public domain. The SCRR has recommended that this should be removed when raising secondary capital.

Further, the regulatory involvement in larger fundraisings should be removed, and a company should only be required to publish an admission to trading prospectus in relation to a secondary fundraising if it is looking to issue shares representing at least 75% of its existing share capital. The current threshold for requiring an admission to trading prospectus currently stands at 20%. If the requirement to produce a prospectus is removed, the process of secondary capital raisings will be more efficient, thus suggesting a lesser need for a documented basis, making the process quicker.

Increasing the range of choice of fundraising structures for companies (near and medium term) Additional fundraising structures are to be made available for use in certain circumstances (this includes the use of Australian-style features, adopted to support, and make the process of pre-emption quicker). Further, cleansing notices should be used in order to confirm that market disclosures are clear and accurate. The SCRR has recommended that this should be used at the launch of the non-prospectus, aiding the process of disclosure.

In addition to this, specific industry groups should agree to make the standard terms and conditions used with institutional investors on secondary fundraises publicly available, reducing time and cost in negotiating bespoke terms.

next steps

Current recommendations, concerning the pre-emption regime and retail investors could be actioned immediately. Near and medium-term recommendations are to require HM Treasury to pass the required legislation, and therefore these recommendations would come into effect over the near/medium term.

For more information, and any guidance or advice on the SCRR recommendations, Cleveland & Co External in-house counsel™, your specialist outsourced legal team, are here to help.

To read the full report on the UK SCRR click here.

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